Fed holds rates near zero, but lifts growth outlook as US economic recovery strengthens
Economic outlook has changed drastically since policymakers met at the end of January
The Federal Reserve said Wednesday that it would continue holding interest rates near zero and reaffirmed its commitment to other easing policies despite a resurgent economy that policymakers expect to rapidly strengthen in the coming year.
The U.S. central bank, as widely expected, held the benchmark federal funds rate at a range between 0% and 0.25%, where it has been for the past year, and said it would so until "labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."
“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak," the committee said in a post-meeting statement. "Inflation continues to run below 2 percent."
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Despite the improved outlook, the majority of policymakers said in their first economic projections of 2021 that they expect rates to remain near zero through 2023. About seven of the 18 Fed officials at the meeting said they expect to start lifting rates in 2022 or 2023 -- an increase from December, when just five forecast a rate hike.
Officials also changed their projections to reflect an increase in the nation's GDP this year; they now anticipate real GDP to surge 6.5% this year, compared to an increase of 4.2% that they forecast in December. Fed policymakers forecast gains of 3.3% and 2.2% in 2022 and 2023 respectively.
On the unemployment side, the Fed forecast the rate will fall from 6.2% to 4.5% by the end of 2021; they expect it to return to the pre-crisis level of 3.5% by 2023.
The Fed slashed interest rates to near-zero last March as the pandemic forced an unprecedented shutdown of the nation's economy. It also began buying $120 billion in bonds each month, a policy designed to keep credit cheap and help the nation recover from the worst economic downturn since the Great Depression.
But the economic outlook has changed drastically since policymakers met at the end of January: Coronavirus caseloads are dropping nationwide as more Americans are vaccinated, prompting state and local governments to ease pandemic-induced business restrictions. On top of that, President Biden last week signed into law a sweeping relief plan that will pump another $1.9 trillion into the nation's economy.
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Still, there remain about 9.5 million fewer jobs than there were one year ago, before the pandemic began. Inflation remains well below the Fed's 2% target.
Despite that, inflation fears, driven in part by a rise in Treasury bond yields, have rattled Wall Street in recent weeks, with some investors worried that stronger-than-expected economic growth will force the Fed to pump the brakes and tighten monetary policy sooner than expected.
Markets soared after the Fed indicated in its Wednesday statement that there are no plans to pull back anytime soon.